While ecommerce was already on the rise prior to the COVID-19 pandemic, the historic shift in customer expectations and behaviors fueled the explosive growth of online shopping. The pandemic was the spark that created a whole new kind of customer — a customer who turned to online shopping from the comfort of their own home to satisfy all of their shopping needs.
With that being said, however, the skyrocketing rates of online shopping came with its own set of challenges — particularly when uncovering the behind-the-scenes side effects on the supply chain. A huge part of retaining customers is having a return policy that is clear and concise, giving customers the security they expect and want. In trying to accommodate all customer demands while simultaneously fighting for market share in a rapidly expanding and competitive fashion industry, retailers are relaxing their return policies. By extending their return windows or allowing online returns to be accepted in stores, the rate of returns has inevitably grown to an unsustainable level.
What customers don’t see is that their returns actually have negative logistical and financial implications for ecommerce sellers. Returns are the often dismissed side effect of online shopping — as ecommerce grows globally, returns will continue to bog down the supply chains of fashion retailers. It is the rising epidemic in the fashion industry that we need to keep a close eye on.
Are Customers Getting Too Comfortable With Returns?
According to Canada Post, 46% of shoppers made a return in 2020, compared to only 37% in 2019, which equates to nearly $430 billion worth of merchandise winding back into warehouses. Why has the volume of returns exploded so dramatically? Perhaps the biggest reason customers choose to make returns in the fashion industry is sizing.
Sizing is a fluid concept; we may find that while one size fits us perfectly at one brand, this may not be the case for another brand. Besides the product descriptions, images, sizing charts and additional information provided by the brand itself, there is never a guarantee that your purchase will meet your expectations. The search for the perfect fit in terms of color, sizing and quality, combined with the often free-of-charge return policies of most companies, encourages customers to become comfortable with the idea of returns.
The recent crisis has revealed the fragmented nature and vulnerability of many supply chains. They are so fragile that with an unexpected breeze, all supply chain operations can come tumbling down like a house of cards. When supply chains are fragmented and managed manually, the stress on them can create gaps in critical production details from sizing to quality. Even the smallest of discrepancies in accuracy errors can disrupt the ‘perfect fit’ and translate directly into customer dissatisfaction. Circling back into the feedback loop, manual supply chain management can contribute to product inaccuracies, thus further heightening the levels of returns.
To add to the problem, online buyers are now indulging in a practice termed as ‘bracketing’. It is the intentional practice of over-buying online by adding the same item in different colors and sizes to your shopping cart, with an intent to only keep your favorite items while returning the rest. Shopping online is a much different experience than shopping in real life. As dressing rooms were no longer an option during the pandemic, bracketing essentially became the not-so-welcomed substitute.
How are Returns Plaguing the Supply Chain?
Products moving backwards through reverse logistics is a costly and labor-intensive process that poses a threat to the profitability of supply chains. While fashion brands have near-perfected the art of issuing their customers with credit instantly following their returns, warehouses find themselves overwhelmed with the volumes of packages being returned.
A disconnect occurs in supply chain planning when products sit idly in the warehouse, creating a misconstrued illusion that inventory is low. Companies will order more product from suppliers when, in reality, returned goods have not yet made their way back into inventory. Not all distribution centers serve as return centers, and even those that do may not be well equipped to handle the staggering rates of returns that ecommerce has generated.
A lack of valuable storage space available at fulfillment centers due to warehouse build-up of returns also causes an increase in unfilled backorders. Reverse logistics sees this build-up trickling downstream into the early stages of the supply chain, impacting all demand planning and inventory optimization processes.
Fashion returns attack profit margins and gut conversion rates to the point of declining revenue. Companies often have to pay out-of-pocket to cover the costs of delivery and return. This process may account for 10% of total supply chain costs — it can even reduce profit up to 30% in poorly managed supply chains.
When the cost of returning products back into the supply chain substantially surpasses the cost of delivering it, there is a problem. It begins plaguing the supply chain when the costs of restoring a returned item erodes margin past the point of profitability. Unfortunately, it is challenging to forecast return trends. Unlike forecasting sales, the unplanned nature of returns makes it harder for operators to optimize resources to handle the returns.
However, if businesses take advantage of predictive analytics tools that give deeper insights into customer return patterns, this forecasting data can be integrated into planning to prevent supply chain disruptions further down the line.
How Can Retailers Mitigate this Risk?
Earlier this year, retail giant Zara made the quiet but risky decision to introduce a charge on online returns. This move was carefully tailored to balance the buyer’s decision to return items without putting them off the initial purchase. A step that once seemed impossible may give other retailers the confidence to follow suit if received with positive feedback. If customers begin purchasing with intent rather than sticking to the ‘buy, try, return’ mentality, it will prove easier for companies to devise a multi-pronged approach to tackle this bottleneck problem.
As a whole, retailers need to actively prevent returns before they occur — whether it’s by providing detailed product information about the quality and measurements, creating accurate size guides with multiple points of measurement while instructing customers on taking measurements, offering a diverse selection of fit models or encouraging customers to publish their reviews.
A data-driven approach will enhance visibility into real-time supply chain data and accurate stock inventory and enable retailers to make informed decisions regarding the handling of returns. Digitized platforms that help retailers address margin dilutions, reduce supply chain errors and waste associated with returns can make returns an affordable option that doesn’t wreak havoc on their bottom lines.
Whatever the chosen strategy, online fashion sellers must continue seeking innovative ways to cut rates of returns, to build a sustainable force field around their business and gain a competitive edge over others.
Kathleen Chan is the Founder and CEO of Calico, the first AI-driven supply chain operating system that powers the $1.4 trillion ecommerce production market from concept to doorstep. She is a 3X startup founder with extensive industry knowledge of D2C brands, the fashion industry and supply chains. With her deep ecommerce experience, she is passionate about building tech for resilient supply chains and helping brands scale.